When you apply for personal loans, home loans, education loans, or any other loans in India, interest rate plays a significant role. This interest rate is what decides the affordability of the loan. But there is one key factor that influences the loan interest rates, and that is the repo rate. This rate is set by the Reserve Bank of India (RBI).
When the RBI reduces the repo rate to support the economy, this is known as a repo rate cut. In this blog, we will understand in detail what is repo rate cut, how it works, the repo rate cut’s effect on different types of loans, and more.
What is Repo Rate Cut?
The repo rate is the interest rate at which the RBI lends money to commercial banks in India when they need funds. And when the RBI reduces this rate to boost the economy, it is called a repo rate cut.
In other words, the repo rate cut is simply the RBI lending money to banks at a lower interest rate. But why does the RBI do so?
Let’s find out!
Why Does the RBI Cut the Repo Rate?
The RBI uses the repo rate to control inflation and help people borrow more when needed.
When there is a repo rate cut, it encourages banks to borrow more money from the RBI. As a result, they may reduce the interest rates on loans they give to customers. So, a repo rate cut often results in cheaper loans and lower EMIs.
Overall, here are a few reasons why the RBI cuts the repo rate:
- To encourage more borrowing by reducing loan interest rates.
- To help the economy grow by supporting businesses and consumers.
- To control inflation and balance price stability.
- To make loans like home loans and education loans cheaper.
Repo Rate Cut Impact on Different Types of Loans
Now, let’s understand the repo rate cut effect on various types of loans:
1. Repo Rate Cut- Effect on Home Loans
Through the Repo Linked Lending Rate (RLLR) system, most home loans in India today are linked to the repo rate. So, when the repo rate goes down, home loan interest rates also go down. This results in lower EMI or monthly installment and lower total interest paid during the loan tenure.
2. Repo Rate Cut- Effect on Personal Loans
Personal loans may be unsecured (no collateral needed) or secured. The interest rates offered by banks often depend on the risk involved. However, many banks still link floating-rate personal loans to repo rates. So, with a repo rate cut, personal loans might be offered at lower interest rates.
3. Repo Rate Cut- Impact on Car/Bike Loans
Automobile loans can be fixed or floating interest rate loans. If the bank offers floating-rate car/bike loans, the repo rate cut can benefit you. This would lower interest rates, thereby lowering EMIs. Also, it becomes cheaper and easier to buy a new car.
4. Repo Rate Cut- Impact on Business Loans
The repo rate cut also lowers the cost of borrowing for small businesses. This not only helps in business growth but also boosts the country’s economy.
Also Read: Impact of Repo Rate Changes on Personal Loan Interest Rates5. Repo Rate Cut- Effect On Credit Card Interest Rates
A repo rate cut does not directly impact the credit card interest rate, as it depends on various factors. So, do not expect your credit card interest to go down when the repo rate is cut.
Fixed vs Floating Rate Loans – Which One To Choose During A Repo Rate Cut?
During a repo rate cut, floating-rate loans benefit as their interest rates may reduce. With this, you can enjoy lower EMIs. However, also keep in mind, if the repo rate increases in the future, your EMI may increase again.
With fixed-rate loans, the interest rate remains the same throughout the loan period.
Conclusion
A repo rate cut by the RBI is often good news for the common man. It lowers EMIs and makes loans cheaper. With a repo rate cut, home and car purchases also become more affordable. It helps in business growth and makes education financing easier. But, make sure you always check with your bank if your loan is repo-linked.
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